Need for a New Industrial Policy in India

Syllabus: GS3/Economy

Context

• In recent years, there has been a resurgence of interest in industrial policy—a topic that often walks a tightrope between government intervention and market forces. India, like many other countries, is grappling with the need for a fresh approach to industrial policy—one that can facilitate sustained economic growth and transform the nation into a global manufacturing hub.

India’s Historical Industrial Policies

• Licence-Permit Raj Era: Post-Independence, India’s industrial policy was characterised by what became infamously known as the ‘License-Permit Raj’. 
• The Industries (Development and Regulation) Act of 1951 mandated government approval for every industrial decision, resulting in excessive bureaucracy.
• The Monopolies and Restrictive Trade Practices (MRTP) Act of 1969 and the Foreign Exchange Regulation Act (FERA) of 1973 further restricted growth and isolated Indian industries from global competition.
  • Unfortunately, these policies stifled innovation and hindered progress.
• On the other hand, laissez-faire approaches left gaps in addressing market failures and public goods provision, resulted in inefficiency and stifled innovation.

Shift Towards Liberalisation

• The 1980s marked a shift towards liberalisation, and the landmark reforms of 1991 dismantled barriers like industrial licensing and reduced import tariffs.
  • These changes aimed to boost efficiency and encourage private investment.
• However, India’s manufacturing sector still faced challenges related to infrastructure, labour laws, and regulatory complexities.

Need for a New Industrial Policy

• Industrial Policies are conceptualises as policies and government interventions specifically designed to alter the composition of economic activities in pursuit of predetermined public objectives.
• These objectives typically encompass enhancing innovation, increasing productivity, and fostering economic growth.
• However, they may also extend to objectives such as facilitating the climate transition, improving labour market outcomes, reducing regional disparities and expanding export capacity.
• A defining feature of industrial policy is its inherent selectivity, wherein policy makers exercise allocative discretion — strategically prioritising certain sectors or industries over others to induce structural transformation, albeit with the implicit trade-off that some sectors may be de-prioritised.

Role of Industrial Policy

• Strategic Interventions: Industrial policies should be purposeful. Governments can strategically intervene to correct market failures, promote innovation, and guide resource allocation.
• Balancing Act: It’s about finding the sweet spot—enough regulation to address inefficiencies but not so much that it stifles growth. Economic progress must not be sacrificed.
• Public Objectives: Industrial policies can target specific sectors, such as automakers, energy companies, or semiconductor manufacturers. These policies may create new costs or provide incentives for R&D and manufacturing investments.

Key Features of the New Industrial Policy

• Make in India: The policy aims to transform India into a manufacturing hub by promoting domestic production and attracting foreign investment. It encourages industries to set up manufacturing units within the country.
• Smart Technologies: The new policy incorporates modern technologies like the Internet of Things (IoT), artificial intelligence (AI), and robotics. These technologies enhance productivity and competitiveness in manufacturing.
• Ease of Doing Business: Simplifying regulatory processes and reducing bureaucratic hurdles are essential components. Streamlining approvals and licences can attract more investment.
• Sectoral Missions: Initiatives like the Semiconductor Mission and Gati Shakti focus on specific sectors, fostering growth and innovation.

Related Concerns

• Global Trends and Shift: Worldwide, there’s a rethinking of market-driven approaches, because of technological disruption, economic stagnation, and geopolitical competition. 
• China’s Rise: China’s rapid industrialisation has prompted both admiration and concern. As it becomes a global manufacturing powerhouse, other countries are reevaluating their own strategies.
• Technological Changes: Automation, digitalisation, and Industry 4.0 underscore the need for government involvement. Industrial policies can shape economic activities, enhance innovation, and boost productivity.
• Weak Manufacturing Base: Countries worldwide recognise that a robust manufacturing sector is crucial for sustained economic growth. No major economy has achieved poverty reduction or long-term prosperity without a strong manufacturing base.
  • India’s recent manufacturing push, including initiatives like ‘Make in India’ aligns with global trends.
  • While the Production Linked Incentive (PLI) scheme is often seen as an industrial policy, it primarily offers financial incentives to boost manufacturing in specific sectors and does not fully address the broader structural challenges needed to transform India into a global manufacturing hub.
• Declining Manufacturing Employment: Advanced economies are grappling with this challenge. They seek ways to maintain competitiveness and create jobs.
• Challenges Faced By Fourth Industrial Revolution: India’s new industrial policy acknowledges the challenges and opportunities posed by the Fourth Industrial Revolution.
  • It aims to position India as a global leader in emerging technologies such as artificial intelligence, blockchain, and drones.
  • The policy emphasises ease of doing business, production-linked incentives, and sectoral missions. By leveraging digital technology, India aims to leapfrog into the global supply chain.

Do You Know About Washington Consensus – It emerged as a set of economic policy prescriptions promoted primarily by institutions based in Washington, D.C., including the International Monetary Fund (IMF), the World Bank, and the United States Department of the Treasury. – It was first introduced in 1989 by economist John Williamson and laid out Ten Broad Policy recommendations (Decalogue of Consensus Policies) that constituted this “standard” reform package that were meant for crisis-hit developing countries, aiming to guide their economic recovery and growth. It includes: 1. Fiscal Policy Discipline: Keep those fiscal deficits in check relative to your GDP. 2. Redirect Public Spending: Move away from indiscriminate subsidies and focus on essential services like primary education, healthcare, and infrastructure. 3. Trade Liberalisation: Open up your markets, embrace global trade, and let those goods flow. 4. Privatisation: Sell off state-owned enterprises and let private hands manage them. 5. Financial Liberalisation: Free up your financial markets—let capital flow, but keep an eye on stability. 6. Monetary Policy: Tame inflation, stabilise your currency, and keep the money supply in check.

Conclusion and Way Forward

• India’s industrial policy is no longer trapped in the maze of bureaucracy. Instead, it seeks a balanced approach—enough regulatory nudge to correct market failures while allowing businesses to thrive.
• As India continues its journey toward economic transformation, a dynamic and forward-looking industrial policy remains crucial.
• A well-crafted industrial policy—one that balances pragmatism with ambition—can propel India forward. 

Daily Mains Practice Question [Q] Given the changing global economic landscape, technological advancements, and India’s aspirations to become a global manufacturing powerhouse, critically evaluate the need for a new industrial policy.

Source: BL